Parents gifted me a rental property. Turbo tax asked me to know the fair value of the property but then I was not asked to input it. Does it need to go somewhere?

[darren5v1]

sorry,

I did not give you enough information. I will be traveling overseas for work in various countries for the year, so i was still planning on leaving as primary residence since I would be renting AirBNBs myself. Does that make more sense?

Thanks

Darren

[Carl]

That makes sense then. So by "empty" you don't mean barren with no furniture or anything. Just make sure it's the house with the homestead exemption on it. Also, it needs to be listed as your residence on your voter registration, as well as your driver's license and all that other stuff. It should also remain your billing address for your utilities, as well as your credit cards. Since you can just pay that stuff on line nowadays, that shouldn't present a problem.

But do be aware that if you have the electric and water turned off during your absence, that is the primary way the IRS will argue it was not your primary residence. It would be best to have someone stay in the place during your absense, as a house watcher maybe. You leave it empty and unmaintained for two years and I'm sure you're aware it will lose value as it deteriorates from mother nature. Besides, someone has to keep the grass cut anyway, right?

[tagteam]

@darren5v1 

If you would actually read the information at the IRS web site (link below), you should be able to glean that you will not qualify for the Section 121 exclusion if you sell within 5 years of the 1031 exchange.

https://www.irs.gov/publications/p523#en_US_2018_publink100073095

Moreover, regardless of which course you decide to take, you will continue to face the issue of non-qualified use.

[Carl]

True. No matter what you do, that non-qualified use will reduce the percentage of the tax-exempted gain on the sale.

[darren5v1]

Hi,

I apologize for my ignorance on the matter. Can you tell me why the "non-qualified use" will reduce my tax exemption. I am reading the IRS links, but I find them very confusing to me juggling the variables of 1031 / Gift / Rental and my unfamiliarity of some of the verbiage.

Are you saying that even if I actually lived in the house for 2 years (going over 5 year 1031 requirement by a few months) I would still not get full 250K or are you saying that by leaving house empty it would fall under "non-qualified use"

Thanks

[darren5v1]

Cause if your saying that no matter what I do I would still suffer "non-qualified"....

if I lived in it and called "Primary Residence" I would have only owned house for 2 years, living it it for both, which I assume would make it a typical primary residence sale since I never rented and allow full 250K

[tagteam]

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@darren5v1 wrote:

...I am reading the IRS links, but I find them very confusing to me juggling the variables of 1031 / Gift / Rental and my unfamiliarity of some of the verbiage.

---

If you read the link that addresses 1031 exchanges, it basically states the following:

If you sell a home that you acquired in a 1031 exchange, then the following test applies:

You can’t claim the exclusion if your basis in your home is determined by reference to a previous owner's basis, and that previous owner acquired the property in a 1031 exchange (for example, the owner acquired the home and then gave it to you); and you sell the home within 5 years of the date your home was acquired in the 1031 exchange.

In short, your parents acquired the home in a 1031 exchange and then gave it to you so you cannot claim the exclusion if you sell it within 5 years of the date your parents acquired the home.

[darren5v1]

My parents acquired the home 3/1/2016.

I would own home on gift 1/1/2020

live in as Primary and sell 1/1/2022 or sometime that year

that doesnt work for 250k?

[tagteam]

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@darren5v1 wrote:

that doesnt work for 250k?

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Yes, it will, but you keep altering the hypothetical.

If you receive the gift and your first use is as your primary residence, then you can take advantage of the 2 out of 5 rule (i.e., use the Section 121 exclusion of up to $250k).

Note that you will be subject to the non-qualified use rule if you rent the house before using it as your primary residence, regardless.

Also note that you essentially have a basis in the structure of $0 since, from all appearances, the house has been fully depreciated. In that sense, you cannot escape unrecaptured Section 1250 gain, which is not covered by the Section 121 exclusion.

[darren5v1]

thanks

I understand. It seems that I can also live in for 2 years, then rent out for up to 3 and then do another 1031 and not pay that depreciation tax you mention, along with tax on at least 250K of the gains on the house

[tagteam]

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@darren5v1 wrote:

I understand. It seems that I can also live in for 2 years, then rent out for up to 3 and then do another 1031....

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There is not really a limit on how many times or how frequently you can do a 1031 exchange. In fact, you can probably delay the inevitable until you literally pass away, at which time the property is stepped up to its fair market value as of the date of your death. The question is whether you want to hold the property (or a series of properties) for that length of time.

[darren5v1]

I see.

Thank you again for your time